The India story is viable as ever

With new records being set in our financial markets on a daily basis - the Dow Jones Index going up more on October 13 (985 points) than it did in the first 85 years of its existence, treasury bill rates approaching zero, volatility index going up by a factor of three, gold spiking up and then falling by more than $200/ounce in a matter of days - we have lost all capacity for wonder.

Asia ex-Japan trading at its lowest valuations in 30 years with all inflows since 2004 now redeemed , are mere statistics these days and do not excite anyone anymore. This time is really different seems to be the underlying sentiment across all asset classes!

It is supposedly so different that previous strengths have become weaknesses and previous weaknesses have become strengths. Every factor we looked at in the past has become seemingly irrelevant and every economist / strategist in the country is trying to find new reasons for being bearish.

In an environment where it is clear that confidence or lack thereof is at least part of the problem it is very easy to shout fire in the crowded financial markets (theatre) and cause more deaths by a stampede than by the original fire.

In a reflexive world, as espoused by famous hedge fund manager and philosopher George Soros, these analysts do not take the possibility that the decisions of thinking agents could itself influence the situation that is being analysed into account . In the end, we are all participants in this economy and not mere observers or commentators and therefore it is incumbent upon us to not exaggerate the reality or draw inverse conclusions from every analysis only because being bearish is the latest fashion in financial markets.

In this environment it is clear that every piece of news can be twisted in whatever way the analyst wants. To be perceived right in the short term, it is easier to view every thing with a negative view.

The RBI has cut interest rates - oh, it must be because they are panicking; X company has announced buy back - the promoter must be getting margin calls; Y fund manager was positive on the market - she must be facing redemptions; India has short-term debt - no NRI will roll his bank deposit; commodity costs are down - end demand will be down even more; low oil prices should help reduce import bill - exports could be down even more; management is predicting that they should be able to still grow 15% - they obviously do not get it.

A few months ago the government of India wrote off $16 billion of loans, made over the past decade or so, to more than 40 million farmers (at the rate of $400 per head) and was criticised by the whole world that economics was being sacrificed for the sake of politics. Now everyone (in most cases the employers of these "bearish on India" analysts ) is asking for similar (and larger) and much more morally indefensible bailouts throughout the world.

Until a few weeks ago, investors were hoping that in pursuit of its reforms policy, the Indian government would accelerate the opening of its banking sector and insurance sector to foreign and private sector; and today all potential foreign partners are themselves seeking equity investments from their governments. Till a few months ago, high oil price was the biggest risk for India and now low oil price reflects demand weakness and therefore a factor for worry.

Last year India had less than $200 bn of foreign exchange (FX) reserves and I do not recall reading any reports that we had inadequate reserves which needed to be built up urgently. Now that FX reserves have fallen from $320 billion to $250 billion , economists are highlighting how we have had a record decline in FX reserves. It is a separate matter that more than half this fall can be explained by the strength of the US dollar which has reduced the dollar value of our reserves held in other currencies.